When You Turn Bullish, Look Overseas

It hasn't held true in the long run, but over the last 6 months the dollar's rally has had a strong inverse correlation to the direction of the stock market.

It makes sense in this environment because a nation's currency is a barometer which represents many things, including a nation's political stability. While the theory of decoupling has been shredded and the world's economies have jumped the track in unison, our currency has become like the old saying about capitalism: it's the worst except for all the rest.

I don't even need to mark-up the 6-month charts of the S&P 500 and the Dollar index below to show the relationship:

(charts above courtesy of www.stockcharts.com)

So, it's reasonable to conclude a few simple things:

1) If the dollar's rally has been due to a flight to safety, then it should give up some recent gains when the markets next mount a sustainable rally.

2) Because global markets/economies are more closely tied than ever, foreign markets should be expected to rally when ours does

3) Appreciation in foreign currencies vs. the U.S. dollar should help enhance gains off the bottom, just as their recent declines have made the pain greater for those with international market exposure of late.

This inverse correlation between the dollar and stock market won't last indefintiely, but it should be a relatively easy play off the bottom.

And this isn't a call saying that the bottom is in now, just that it will likely be more rewarding to trade, say, broad foreign or country-specific ETFs rather than something like the (NYSE: SPY) or (Nasdaq: QQQQ) when the market does turn. As you start making plans for what you'll do at the turn, keep this one in mind.

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